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Liberty Health Sciences: Eat or be eaten

The big news last week on Liberty Health Sciences Inc. (CSE:LHSIF) was about their legal woes. Many ambulance chasing law firms reminded investors of the March 8 deadline to join their class action lawsuits against the company.

According to the various complaints, Liberty management “made false and misleading statements to the market. Liberty Health was involved in a fraudulent scheme with Aphria Inc. in which transactions and acquisitions were completed specifically to provide undue benefits to company insiders from both parties.”

This has lead to the forced exit of CEO George Scorsis and CFO Rene Gulliver—and a search for permanent replacements. Current President Victor Mancebo and Director of Finance Scott Meyers were appointed to lead the company temporarily.

These temporary appointments send a negative signal to investors: the company has no depth of management. Otherwise, these two folks would have been promoted to fill the vacancies permanently.

None of the class action suits have been court certified, and any conclusion is a long way off. Most class action suits end up settling for a fraction of the amount demanded, but one thing is clear: the price of Liberty Health stock needs some seriously good news, and last weeks legal reminder does nothing to help.

True, the stock price has appreciated about 5.6 percent this year, but that paltry sum pales when compared to the average cannabis stock that has gained over 50 percent. Over the past year, Liberty shares are off 65 percent. Shareholders cannot be happy.

Liberty needs capital

To grow into the bazillion dollar, end-user market that so many cannabis pundits are forecasting will require lots of capital. With little or no participation by U.S. financial institutions, equity has become the “go to” solution.

The cannabis industry is consolidating at a frenzied pace, so stock price means everything. The mantra is eat or be eaten. With a $260 million market cap and underperforming stock price, Liberty Health is hardly in a position to eat much of anything.

A look at Liberty financials confirms this opinion. Through the nine months, cash totaled C$ 25 million. Losses from operations for that period totaled roundly C$13 million on C$ 6.6 million in revenue. Total negative cash flow amounted to C$ 31 million.

From this perspective, it is easy to see the challenges ahead. Short of finding outside capital, Liberty will be hard pressed to maintain its goal of rapid growth. Liberty was spun out from Aphria in 2011 to acquire and operate U.S.-based companies in the medical cannabis market. Liberty claims it brings value to acquired companies with their “proven expertise in commercial scale greenhouse growing at a low cost . . .”

These claims make for great reading. However, with gross margins at the turn of nine months at just 24 percent, any claims of low cost have yet to be proven.

What are Liberty Health’s true assets?

What makes Liberty stand out? It merely is the location. The company is headquartered in Toronto, but that is about the only thing that is Canadian.

Liberty’s playground is in Florida. On March 1, the company announced the opening of its 11th dispensary in the sunshine state. By my count, that puts them close to the top in the state.

With 21 million in population and one of 23 states to legalize cannabis for medicinal purposes, Florida is the third largest market today, and that is even before considering the prospects of recreational purposes in the future. So, having a large and expanding footprint in Florida has real value.

Liberty operations are vertical with their Alachua and Gainesville Florida locations accounting for a 150,000-square-feet of combined production. This has real value as well, especially when considering both the cost and time required to get approvals from the DOH.

Verdict: Liberty should be eaten

There are many details to Liberty’s legal/management replacement story. The Internet is covered with them, for those readers interested in getting every nugget. The focus here is on pointing out that Liberty Health needs some deep-pocketed help, and a deal to sell the company is one path. This is not to suggest that I have non-public information. Nor is it to suggest that a sale is the only solution.

The point is Liberty Health, with a market capitalization of $340 million and a stock that has severely underperformed, the group is too small to compete with the giants. They are better served finding a more substantial partner hungry to be in a big retail market like Florida.